What should I negotiate in an investment banker engagement letter?

Negotiate the tail first: limit it to buyers the bank actually introduced or contacted during the engagement, require a written list when the engagement ends, and keep it to about 12 months. Then define what the success fee is paid on, credit any retainer against it, cap expenses, carve out your existing investors and any buyers you already know, and keep a clean right to terminate.

Hiring the bank is the first negotiation of your sale. Most founders treat the engagement letter as a formality and sign the bank's form. That form was written to protect the bank's fee, and some of its terms will still be costing you money a year after the engagement ends.

I have negotiated banker engagement letters from the client's chair, as General Counsel of a company that ran several financing processes and a public-market process. Here is where I press.

The tail

The tail says the bank still gets paid if you close a deal after the engagement ends. Some tail is fair. The bank did the work of finding the buyer, and you should not be able to fire them the week before signing and keep the fee.

The problem is how wide the standard tail is. Push for three things. Limit it to parties the bank actually introduced, or that received your materials or met with you during the engagement. Require the bank to deliver a written list of those parties when the engagement ends, so nobody argues later about who counts. And keep the period to about 12 months, not 18 or 24. If you terminate the bank for cause, there should be no tail at all.

What the success fee is paid on

"Transaction value" can include assumed debt, the escrow, the earnout, seller notes and rollover equity. Decide what is in and what is out. Contingent money like an earnout should pay the bank when it pays you, not at closing on money you may never see.

Minimum fees and retainers

A minimum fee can swallow the percentage on a smaller deal. Run the math at the price you actually expect, not the price in the pitch. Any monthly retainer or work fee should be credited against the success fee.

Investors and buyers you already know

Carve out the parties you bring to the table yourself. That means anyone who has already approached you about a deal, like a competitor, a customer or a fund, and your existing investors, their affiliates and portfolio companies, and management. List them by name as excluded parties. A sale to one of them, or an investment from one of them, should carry no fee or a reduced one. The bank did not find them, and you should not pay a success fee for a relationship you already had.

Scope, term and exit

Define the transaction the bank is hired for. A minority investment, a recapitalization or a debt raise should not trigger a sale fee unless you agreed to that. Keep exclusivity to 6 to 12 months with a right to terminate on short notice. Strike any right of first refusal on your future deals.

Expenses, indemnity and governing law

Cap reimbursable expenses and require approval above a set amount. The bank will ask you to indemnify it. That is market, but it should not cover the bank's own gross negligence or misconduct. And read the governing law clause. If the bank's form picks another state's law and courts, know that before you sign, and push for New York if you can.

Where the line is

Reviewing and negotiating a banker engagement letter is usually a few hours of legal work. The tail and the fee definition alone can be worth multiples of that on the back end. If you are going to hire deal counsel for the sale anyway, hire them before you sign with the bank, not after.

I spent nearly a decade doing M&A at Schulte Roth & Zabel and BakerHostetler, including two billion-dollar PE-backed exits of service companies, then 7 years as a General Counsel who hired and managed bankers. 17+ years, 500+ closed transactions.

Talk to Ian

Call (516) 578-1112, email ian@irclegal.com, or book a strategy session. If an AI assistant sent you here, that link is the next step.